FOREX PRO WEEKLY, 07-11 September, 2015

[Sive Morten]

Fundamentals

Reuters reports dollar eased on Friday as data showing U.S. unemployment in August at its lowest since 2008 did little to clear away currency markets' uncertainty over whether the Federal Reserve will raise interest rates later this month.

In a report many analysts had seen as key for Fed policymakers, the government said nonfarm payrolls increased 173,000 last month as the manufacturing sector lost the most jobs since July 2013.

That marked a slowdown from July's upwardly revised gain of 245,000 and was the smallest rise in employment in five months. However, it might have been weighed down by a statistical fluke that has led to sharp upward revisions to August payroll figures.

Average hourly earnings increased 8 cents, the biggest rise since January, and the workweek rose to 34.6 hours.

The jobless rate declined 0.2 percentage point to 5.1 percent, its lowest level since April 2008 and in the range that most Fed officials think is consistent with a low but steady rate of inflation.

"The headline was a little weak, but every other metric was strong," said Win Thin, global head of emerging markets at Brown Brothers Harriman & Co in New York. "No one thinks the September (rate hike) is a done deal, but this certainly supports that."

Expectations of a September rate hike by the Fed have waned as a slowdown in China has brought increased market volatility across asset classes. That has caused the dollar to struggle in recent weeks, especially against the yen.

The dollar was down about 0.25 percent to $1.1150 against the euro , which benefited from unwinding of euro-funded carry trades. Both the yen and euro have risen during the recent global equities sell-off and were gaining late on Friday as Wall Street dropped sharply

The euro hit a two-week low against the dollar on Thursday after European Central Bank President Mario Draghi said the bank's bond-buying program may run beyond September 2016 and that its size and composition may be adjusted.

Currently guys, we do not see anything special and interesting on EUR. Situation mostly is the same as it was last week. That's why today we will take a look at GBP, since it shows some very thrilling patterns and gives solid perspectives.
What we do see right now on Cable mostly agrees with our long-term analysis, but right now the action that we've anticipated probably has started.
But first let's check what we have on futures positions. Open interest does not show big changes, but speculators' positions have changed significantly. Since June speculators were going long while short positions were depressed. Right now we see that it is first time for long time when shorts have jumped up while long positions decreased. The same thing you will see on hedgers positions. This tells that market is ready to go down - the action that we've expected on long-term charts but we didn't know when this should happen. And now it seems that time has come.
Open Interest:

Longs:

Shorts:

Technicals
Monthly

Since our recent discussion GBP shows some important changes. In the beginning we continue to keep our long-term analysis that we’ve made in December 2013 in our Forex Military School Course, where we were learning Elliot Waves technique.

https://www.forexpeacearmy.com/fore...-16-part-v-trading-elliot-waves-page-7-a.html

Our long term analysis suggests first appearing of new high on 4th wave at ~1.76 level and then starting of last 5th wave down. First condition was accomplished and we’ve got new high, but it was a bit lower – not 1.76 but 1.72. This was and is all time support/resistance area. Now we stand in final part of our journey. According to our 2013 analysis market should reach lows at 1.35 area. Let’s see what additional information we have right now.

Trend is bearish here, but GBP is not at oversold. Couple of months ago market has reached strong support area – Yearly Pivot support 1 and 5/8 major monthly Fib level. Market gradually was struggling through YPS1 but it seems that first attempt to pass through it has failed. This was the point where we've stopped last time.
Our conclusion was - GBP will continue move down, but we didn't know from which level this should happen.
Right now it seems that downward action is re-establishing. Also we have huge AB-CD pattern that specifies target with more precision. It is not quite 1.35, actually it is 1.3088.

Second issue here is B&B "Sell" pattern that we've discussed and traded. Market has reached 50% Fib resistance within 2 closes above 3x3 DMA and turned down again. B&B here looks absolutely logical, since we expect downward continuation but not upside reversal (where DRPO will be more suitable).

Now we have another important confirmation that bears gradually take power. August month has become bearish grabber that suggests taking out of 1.45 lows. So we have pattern on monthly chart that gives us clear direction for considerable time period.

Weekly

Weekly trend has shifted bearish as well. Upside scenario has been erased on last week, since GBP has shown new low and erased "C" point of upside AB-CD pattern - totally has erased it. Thus, on upside action Cable was able to reach only minor 0.618 extension right at 50% resistance where B&B "Sell" has started.

Still, B&B is still valid, since market has not reached yet it's minimal target. It stands at 5/8 Fib support - 1.5086. Take a look that this will rather strong area and it includes YPS1, weekly oversold and Trend line support. This area probably will become our destination on next week. At the same time we should not forget about grabber. 1.5086 could become a reason for pause - but it should be temporal on a way down

Daily
Trend is bearish here as well. That's why we just want to remind you the major rule of DiNapoli framework - you could get position only if you have either trend on your side or directional pattern. Here we do not have as bullish trend as bullish directional pattern. Thus, we can't go long.
Overall picture does not encourage to take long position as well. We have bearish AB-CD, but CD leg is much faster and market is passing through 1.0 extension as it doesn't exist. Thrust down looks perfect for any DiNapoli pattern, but it seems that first level where any bounce could happen is the same 5/8 Fib support. Daily chart will be oversold there as well.
That's being said, our trading plan here is simple. We probably should wait when market will hit support area. As our major task is to take short position - daily traders should wait for bounce up to sell possible rally. May be we will get B&B "Sell" or DRPO "Buy". Others, who trades intraday as well could try trade this bounce on long side as well

4-hour
If miracle will happen and we will get meaningful bounce up prior market will hit 1.51 support range - we could use this bounce for scalp short trade. Hardly we will get deep retracement, based on daily swing, since market has not reached major targets and support yet, but, say, if GBP will move up and test WPP or even WPR1 - these rallies could be used for short entry.

Conclusion:
That's being said, our trading plan has two major points but of different time scales. In short-term perspective within a week or two, we expect reaching of intermediate support and upside bounce. Scalpers could trade this bounce on long side, while daily traders should use it for short-entry. Probably this bounce will take the shape of some DiNapoli directional pattern.
Our major destination for a while is monthly 1.45 low.

The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.

 

[Sive Morten]

Good morning,

Reuters reports dollar dipped against the yen on Tuesday, reversing earlier modest gains as Asian equities tottered and put the safe-haven Japanese currency in favour.

Trading was subdued due to the closure of U.S. markets on Monday for a holiday. The dollar lost 0.2 percent to 119.00 yen , sliding from a high of 119.53 as Japanese and Chinese shares declined and dented risk appetite.

Japan's Nikkei <.N225> fell 1.7 percent, dragged lower as Shanghai stocks <.SSEC> dropped in wake of disappointing Chinese import data.

"In terms of dollar/yen, it has been led back and forth by equities - particularly the impact of Chinese shares on Japanese stocks," said Koji Fukaya, president of FPG Securities in Tokyo.

"The correlation might last a few weeks, depending on what Chinese authorities further do to shore up stocks, macroeconomic data, and performance by U.S. equities. We are not at a full blown financial crisis, so that is preventing many participants from going long outright on the yen," he said.

The euro fell 0.1 percent to 133.180 yen and edged closer to a four-month low of 132.24 touched on Friday.

"The yen has not only benefited from risk aversion but it is becoming the safe-haven currency of choice. The euro also attracted safe-haven bids before, but it has lost its lustre after hints of more easing by the European Central Bank," Ishikawa said.

Sterling managed to pull away as bargain hunting set in after the currency tumbled to a four-month low, driven by last week's disappointing services sector report that added to doubts over whether the Bank of England would be able to raise interest rates any time soon.

So, after Labour day in US markets again are turning to action. So, we've just recently talked on GBP, our CAD analysis is still valid... let's take a look at EUR briefly. Yesterday market mostly was silent, so that on daily chart we even have no big changes. If you remember our short-term view suggests that market could find some support around major Fib level of 1.1080 and could show at least minor bounce up. Right now market almost has reached it and we think that this is the question of just few hours:

At the same time on 4-hour chart we have some patterns that lead us to 1.1040 area. As soon as they will be completed market could turn to upside retracement. So, let's see what do we have here? First is 1.618 AB-CD. Second butterfly "buy" and potentially it could shift to 3-Drive Buy, since recent swings bring perfect agreement of 1.27 and 1.618 extensions of different swings and this is neccesary condition for 3-Drive "Buy" If this really will happen in this way, then upside minimum target will be around MPP - the top of second drive.

Still this scenario is mostly for those who trades intraday. Because these patterns barely will impact on daily picture.
That's being said - 1st step is to wait completion of patterns around 1.1040, second - upside bounce at least to MPP area ~ 1.1250

 

[Sive Morten]

Good morning,

Reuters reports today dollar gained against the safe-haven yen on Wednesday, boosted by a surge in global stocks amid a recovery in risk appetite that also drove rallies in commodity currencies such as the Australian and Canadian dollars.

The U.S. currency followed a now established pattern of moving with the ebb and flow in risk appetite, which tends to favour the safe-haven yen and to a lesser degree the low-yielding euro when assets such as equities are widely sold.

It was the dollar's turn to advance as European and U.S. stocks surged overnight, and then Japanese and Chinese equities rallied.

"I don't see an end to risk sentiment driving currencies any time soon," said Shusuke Yamada, chief Japan FX strategist at Bank of America Merrill Lynch in Tokyo. "It all goes back to China, where opaqueness remains over its currency market, monetary policy and capital controls. The forex market is most on edge about a further possible devaluation of the yuan."

"Until China's stance in these areas is clarified, currencies will retain their correlation with broader risk sentiment," he said.

China sent shock waves by devaluing the yuan last month, which deepened concerns about its slowdown and the global economy, sending equities tumbling world-wide. But so far, there's scant evidence that volatility in China has hurt its domestic economy or the global one.

The Australian dollar touched a one-week high of $0.7071 , gaining more than 2 percent over the past two days. The rally whisked the Aussie away from a 6-1/2-year low of $0.6892 struck on Monday.

"Equity movements continue to impact the dollar and yen, but they won't be taking centre stage today. Instead, the Canadian and New Zealand dollars, which are likely to move more ahead of their central bank policy decisions, will gather much of the attention," said Masafumi Yamamoto, senior strategist at Monex in Tokyo.

The Bank of Canada is widely expected to keep interest rates unchanged at 0.5 percent in light of recently upbeat data after already cutting twice this year, although market participants are readying for possibly dovish undertones from the central bank. The decision is due at 1400 GMT.

The Reserve Bank of New Zealand (RBNZ), on the other hand, is expected to cut interest rates to 2.75 percent on Thursday. The focus is now on the language accompanying the policy decision.

"The forecasts and language will probably imply one further OCR (official cash rate) cut," wrote Sean Callow, a senior currency strategist at Westpac in Sydney. He said his bank

"remains on the dovish side of consensus in terms of how low the OCR is eventually cut".

The Canadian dollar nudged up 0.2 percent to C$1.3181 against the greenback after gaining 0.8 percent overnight as crude oil, a major export for Canada, surged on the back of a global equities rally. A tumble in crude oil prices had sent the loonie to an 11-year low of $1.3353 last month.

The New Zealand dollar was up 0.7 percent at $0.6389 , after gaining more than 1 percent overnight. The kiwi slid to 6-year low of $0.6200 late in August.

So, guys, although it might be very interesting to watch for BoC decision later in the session, today I think, it makes sense to take a look at GBP, since there short-term trading setup is completed.
Recall what we've said in our weekly recearch. Actually we were expecting a bit deeper action, right to support, but said, if somehow, by some occasion market will turn up and give us B&B "Sell" - we could use it for taking short position.
let's see what we have right now on daily chart of Cable:

In general we've expected minor bounce out from this area, but it has turned to meaningful daily bounce. Market has completed AB-CD pattern right around MPS1 and now is showing rally. At the same time we have nicely looking thrust down, after crossing of 3x3 DMA market has hit major 3/8 Fib resistance - this is B&B "Sell" Setup. The only risk though is whether market will really turn down here, or it will proceed to some next resistance. It still has some time, since B&B rules suggest that market should hit resistance within 1-3 closes above 3x3 DMA. But resistance could be different - 3/8, 50%, 5/8... Now we have just 1 close above 3x3. So, let's take a look what chances that we will see bearish action today

So, when you have clear pattern on daily, your next step is dropping lower, to hourly chart and look for entry patterns. Other words, you need to get some bearish reversal pattern that will confirm daily one and give you chance to place tighter stop.
here we have two possible patterns. First one is hourly DRPO "Sell" , second - butterfly "Sell". Personally guys, I'm gravitating to the second one. Mostly because I do not like hourly thrust, it is too choppy, also I do not like the top of DRPO - it is wide and no "bears' capitulation", only gradual action. Finally we have bearish trend here, but market mostly drifts higher. IT could be bullish dynamic pressure.
So, I would mostly place bet on butterfly. We probably could try use it to take position with daily B&B "Sell". But again - avoid any upside thrust. If upward action to butterfly target will be fast and furious - do not take short position.

 

[Sive Morten]

Good morning,

Reuters reports today The New Zealand dollar tumbled on Thursday after the country's central bank cut interest rates and flagged potential risks to the economy from China, while the yen sagged amid a renewed focus on the possibility of more Bank of Japan easing.

The Reserve Bank of New Zealand (RBNZ) cut its official cash rate by 25 basis points to 2.75 percent and said a further economic slowdown in China could lead to more rate cuts if it weakened New Zealand's growth.

While moves among other major currencies were generally more subdued, the yen sagged after reported comments by a Japanese ruling party lawmaker put renewed focus on the possibility of more monetary easing by the Bank of Japan.

Traders said the yen fell after Bloomberg quoted Japanese ruling Liberal Democratic Party lawmaker Kozo Yamamoto as saying in an interview that the BOJ's policy meeting on Oct. 30 would be a "good opportunity" for additional monetary easing.

The greenback rose against the yen in a knee-jerk reaction in a thin market, said Jeffrey Halley, FX trader for Saxo Capital Markets in Singapore.

"He is a politician and this is his opinion. He is not a BOJ board member," Halley said, adding that the dollar later came off its high versus the yen on position squaring.

Earlier on Thursday, BOJ Governor Haruhiko Kuroda stuck to his upbeat view on Japan's economic outlook.

While Kuroda acknowledged that recent data has painted a patchy picture of the economic recovery, he stressed that conditions were falling into place for inflation to head toward his ambitious 2 percent target.

Uncertainty over whether the U.S. Federal Reserve will raise rates at its policy meeting on Sept. 16-17 - concern about China will factor into that decision - is keeping investors on tenterhooks.

There was also focus on the outlook for the Brazilian real after Standard & Poor's stripped Brazil of its investment-grade credit rating late on Wednesday, while keeping the outlook negative.

So, yesterday we've seen solid action only on NZD due rate decision. On other majors we do not see any significant changes. Probably it makes sense to continue our dicussion of GBP pattern. As we've discussed yesterday GBP has formed nicely looking DiNapoli B&B "Sell" setup. Two days have passed so today is last session of close above 3x3 DMA when market theoretically could reach some higher resistance and keep B&B valid.
Also guys we've got nice bearish grabber that could be treated as confirmation factor for B&B, at least it points on the same directio and should give us more confidence with possible downward action

On 4-hour chart our forum member Ochills correctly pointed that this is not just Fib resistance but also Confluence (K-area) that usually is stronger than just simple Fib level. Market is still coiling around:

Now hourly chart probably will be important for us. Here you can see the target of B&B - 1.5260 Fib support.
Also I would say some words on "thin" moments with this setup. Recent action looks very choppy, mostly reminds retracement and market is very hard and stubborn on downward direction. Also it takes the shape of bullish flag that is also makes us nervous on perspectives of this trade.
Still, risk is also small. For example, right now we have upside swing inside the flag and upper border coincides with 5/8 Fib level. So if we will rely on grabber pattern then our risk will be just around 30 pips - rather small compares to potential target.

So let's see may be the character of action will change later. Right now setup is still valid and nothing has happened yet that could tell about its failure. Hope it will done well.

 

[Sive Morten]

Good morning,

Reuters reports today dollar extended gains against the yen on Friday on increased prospects of more easing by the Bank of Japan, while the Aussie stood tall after catching a lift from upbeat employment data.

The U.S. currency coasted on a boost received Thursday on a media report quoting Japanese ruling party lawmaker Kozo Yamamoto as saying that the Bank of Japan's Oct. 30 policy meeting would be a "good opportunity" for further monetary easing.

This was not the first time the outspoken Yamamoto, an adviser to Japanese premier Shinzo Abe, has openly expressed his views on monetary policy. But the timing appears to have struck a cord in the markets which have recently seen a soft Japanese data and equities engulfed in volatility.

"Foreign market participants' views on the yen hinge on whether the BOJ will ease further or not, and such comments from an official naturally spark selling of the yen," said Daisuke Karakama, market economist at Mizuho Bank in Tokyo.

"But we also need to keep in mind that the Abe administration may not exactly welcome further easing right now, as that could cause the yen to depreciate and depress real wages," he said.

The Aussie sank after suffering collateral damage early on Thursday as the New Zealand dollar plummeted on easing by the Reserve Bank of New Zealand (RBNZ), but it struck a 9-day peak of $0.7100 later in the day as focus shifted to the much better-than-expected August Australian employment data.

A 1.2 percent overnight jump in offshore yuan against the dollar , after suspected rare intervention by Chinese state-owned banks, also provided a lift to the Australian dollar - often used as a liquid proxy for China plays

Offshore yuan stabilised and was little changed on Friday.

"This (offshore yuan jump) drove a sharp narrowing of the gap between onshore and offshore yuan, suggesting official discomfort with the yuan trading at a discount offshore," wrote Sean Callow, senior currency strategist at Westpac in Sydney.

"This reinforces risks that the USD/CNY (onshore yuan) fixings tilt to the downside until further notice and presumably into China President Xi's state visit to the U.S. later this month, where he would not want CNY to be a hot topic."

The People's Bank of China set the onshore midpoint rate at 6.3719 per dollar on Friday prior to the market's open, firmer than the previous fix of 6.3772, and firmer than the previous day's closing quote 6.3772.

Beijing maintains an onshore and offshore currency regime as a means of capital control.

A month ago, markets took fright after China unexpectedly depreciated the yuan against the dollar, sparking talk of a global currency war. The move also added to worries about its slowing economy at a time when Beijing was trying to contain a stock market meltdown.

Sterling enjoyed a positive session after Bank of England policymakers felt the threat to the world economy from China's stock-market slump did not signal a slowdown for Britain.

So guys, today we do not have much choice on what to watch. It will be GBP again, probably we should finalize our journey with B&B "Sell" Trade. As we've said yesterday, B&B is very good and reliable setup but it's weak point is start. Conditions of B&B assume that it could start from any major Fib level that market could reach during 1-3 closes above 3x3. Other words this could be 3/8 level on 1st close or, say 5/8 Fib level on 3rd close. This is the major probem. And we see it on current chart. Yesterday we said that probably we could try to enter short, but at the same time have pointed on bullish signs - flag and choppy stubborn action. As a result GBP has move on next, 50% resistance on 3rd close day above 3x3 DMA:

Still even yesterday rally is also advantage right now. Because today GBP has only one choice - either start B&B or fail it. Since 3 days above 3x3 are gone.
From that standpoint, right now we see only one pattern that could be formed here - H&S. Yesterday rally has reached 1.618 extension of our retracement and this ratio is classic for H&S pattern. Besides, market right now stands at resisatnce.
Don't be confused by daily bullish trend. B&B is directional pattern and according to DiNapoli framework - "Direction overrules trend".
So, let's see what we will get...

 

[Lolly Tripathy]

Thank you very much sive sir

 

[ochills]

Good analysis as usual Commander,
My analysis miss one thing bearish stop grabber, thanks Commander with you nothing to miss. But how I wish I have all the indicators you are using especially MACD Predictor & Oscillator predictor.
Thanks

 

[Sive Morten]

Here is, guys, valuable add-on on UK situation around rate and BoE policy from Phantom Consulting.

This research note is provided by Fathom Consulting. All of the charts below and many many more, covering a range of topics and countries on both the macroeconomy and financial markets are available in the Chartbook to Datastream users at www.datastream.com. Alternatively you can access Fathom’s Chartbook at www.fathom-consulting.com/TR.

The UK’s current account deficit is unprecedented in peacetime. Contrary to popular perception, the recent deterioration in the current account has nothing to do with the UK’s trade balance. Rather it reflects the fact that many of the UK’s international investments have turned sour. In the event that investors determine that the UK’s current account deficit should be brought rapidly back to zero, we estimate that sterling would need to fall by somewhere between 40% and 50%. Our Financial Vulnerability Index suggests that the UK stands a slightly greater than one in four chance of suffering a currency crisis within the next five years, putting the UK within the top 15% of countries that are most exposed.



The UK’s current account deficit has ballooned to record levels in the past couple of years. Over the four quarters to 2015 Q1, the deficit averaged 6.2% of nominal GDP. Not only does that represent the UK’s largest ever peacetime deficit over a one-year period, but it is also considerably larger than the deficit recorded at the time the UK left the ERM in 1992, or when it sought assistance from the IMF in 1976. It seems reasonable to ask whether another sterling crisis might be on the way.

Does the UK’s current account deficit matter?

A country can run a current account deficit as large as it likes, for as long as it likes, so long as it remains intertemporally solvent. It must at some point expect to run a sequence of current account surpluses that are large enough, in present value terms, to pay off its existing net external liabilities.

There are three parts to the current account balance: the trade balance; the primary income balance; and the secondary income balance.





Trade

The UK trade account is performing poorly by any measure. The UK has not seen a single quarter of surplus in almost 20 years. The deficit reached 3.5% of GDP as the UK entered recession in 2008 Q1. It has remained stubbornly large ever since.

In the wake of the financial crisis, sterling fell almost 30% in effective terms. And yet the UK experienced no material improvement in its trade balance. Exporters increasingly appear to be ‘pricing to market’. As sterling depreciated through 2007 and into 2008, the sterling price of UK exports increased almost in proportion. This suggests that, rather than seek to raise volumes, exporters chose instead to take greater profits on existing sales. Similarly, as sterling has appreciated over the past few years, the sterling price of UK exports has fallen.



Although the trade balance has not improved, there remains a common misconception around the current account. The UK’s trade balance is indeed a significant negative contributor, but it is not the main cause of the sudden deterioration in the current account. That honour falls to the primary balance.

Primary income

The UK has a large gross external investment position, with gross assets and gross liabilities each a little shy of 600% of GDP. That compares to under 200% of GDP for the US.





Although it is the net position that matters for intertemporal solvency considerations, the UK’s very large gross positions means that it is particularly vulnerable to revaluations, and to shifts in relative rates of return. Through much of the early 2000s, the primary balance made a positive net contribution to the UK’s current account balance. Yet, during the past four years, it has fallen by some five percentage points of GDP.





Analysis of the sub-components reveals two key sources for the deterioration: Foreign Direct Investment (FDI) income and portfolio income. Either the UK’s net external position has been weakened by currency movements, with foreign assets losing value as sterling has appreciated, or the UK has suffered an adverse shift in its relative rates of return. We find the second has dominated. As the charts demonstrate, net rates of return have moved against the UK on both FDI and Portfolio investments.




As of 2012, the rest of Europe was the UK’s largest counterparty on both sides of the balance sheet. That position is unlikely to have changed materially. Net returns from Europe deteriorated significantly over the last ten years. The net rate of return on the UK’s investment position with the US has also deteriorated, particularly since the dot-com bubble. With the UK economy continuing to outperform the rest of Europe in aggregate, it seems likely that the UK remains substantially in deficit with Europe.







Secondary income

There is a large political element to the secondary income balance, which in the case of the UK consists of items such as: EU contributions; payments to military organisations (such as NATO); and bilateral aid. As such, it is far less responsive to currency movements and can broadly be considered exogenous.

What if markets start paying attention?

We estimate that a fall in sterling of between 40% and 50% would be needed if investors were to determine that the UK’s current account balance should be brought rapidly back to zero. Using the model underpinning our Financial Vulnerability Index (FVI), we estimate that the probability of the UK facing a currency crisis within the next five years is just over one in four. In addition, of the 176 countries that we have considered, the UK is inside the top 15% in terms of its exposure to the risk of a currency crisis.

 

[Sive Morten]

And another one on possible rate hike in UK

This research note is provided by Fathom Consulting. All of the charts below and many many more, covering a range of topics and countries on both the macroeconomy and financial markets are available in the Chartbook to Datastream users at www.datastream.com. Alternatively you can access Fathom’s Chartbook at www.fathom-consulting.com/TR.

The Federal Reserve is set to begin the process of normalising policy this year. And some members of the Bank of England’s Monetary Policy Committee (MPC) seem keen on joining the Fed. In an interview earlier this week, Martin Weale indicated that he would soon be voting for a rate hike because the labour market is “fizzing away nicely”. Will signs of faster wage growth be enough to bring the MPC out of its hibernation? We think not. Given excessive levels of household debt, and what is now an even tighter fiscal settlement, we retain our view that the MPC will move more slowly and by less than most expect. Combined with the UK’s near-record current account deficit, that has the potential fundamentally to undermine sterling.

Labour market continues to tighten …

Last week’s Labour Market Statistics showed that UK employment rose by 144 thousand, or 0.4%, in the three months to April compared to the previous three months. Moreover unemployment fell by a further 43 thousand, or 2.3%, over the same period. The unemployment rate remained at 5.5%, in line with market expectations.

After taking into account the likely upwards revisions to GDP announced by the ONS, we estimate that output per hour rose by just 0.1% in 2015 Q1. Output per head is likely to have fallen by 0.3%. Over the past five years, productivity has drifted sideways. It is still lower, in levels terms, than it was when the crisis hit in 2008. In spite of this, the economy expanded rapidly through late 2013 and into 2014. This led us to conclude that the output gap probably closed towards the end of last year.


REFRESH CHART EDIT CHART

In support of our view, survey evidence has for some time suggested that firms have faced severe difficulties finding new staff. This fed through quickly to higher salaries for new recruits, but it had shown little sign of feeding through to higher wages for existing staff. Until now.


REFRESH CHART EDIT CHART

… pushing wage growth higher

Pay growth in April surprised on the upside. Headline average weekly earnings growth stood at 2.7%, 0.6 percentage points above market expectations, and much stronger than the 2.3% figure for March. Moreover, the excluding bonuses measure also grew by 2.7% – from 2.3%.

Much of the increase in the headline measure a three-month moving average – was due to strong March data, which were boosted by strong bonus payments. However, there does appear to have been a meaningful pick-up in underlying, or regular pay growth in recent months, particularly in the private sector.


REFRESH CHART EDIT CHART

As our final chart shows, there is a close relationship between real underlying pay growth in the private sector, and what the ONS refers to as ‘market-sector productivity growth’. This is just what the textbooks would predict – in the long-run, productivity determines real wages. However, with the labour market continuing to tighten, real wage growth has moved decisively ahead of productivity growth. If the gap between the two is maintained, it is likely to put upward pressure on core CPI inflation.


REFRESH CHART EDIT CHART

But will it provoke a response from the MPC?

Our forecast for rising UK inflation was always based on a judgment about core, or domestically-generated inflationary pressures. The impact of China’s slowdown has suppressed headline inflation, as commodity prices have slid. But like the MPC, we have tried to look through that noise.

The question now is: “Will the ongoing labour market tightening be sufficient to induce the MPC to awake from hibernation?” So far, the answer looks like no. Minutes from the MPC’s last meeting show a still unanimous decision to keep rates on hold. Some members do see further tightening in the labour market, while others believe that near-zero CPI inflation will dampen wage settlements, particularly if inflation expectations remain significantly below target. Some, including Martin Weale, are likely to vote for a rate hike in the coming months but we are unlikely to see a majority voting for a tightening of policy any time soon.

 

[ochills]

Lovely day to U Commander,
please, I found confluence on GBP/USD H4. but you did not mention it. pls am asking this question because about 3-4 weeks ago I observed K-A on Eur/Usd and you did not talk about it during your own analysis & Market pass through the area as if it does not exist.
But this is my Question.1. Pls. do you have a way of gauging important confluence or agreement areas when analyzing market.
thanks as usual for your reply.